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For most people, tax planning is a wakeup call given by the HR Department around this time of the year. Tax planning is more than just investing in a tax saving instrument. If done efficiently, it can reap long term financial benefits for you.
Here are some useful tips to consider while planning your taxes.
1. Start Early
Tax planning is a financial exercise which should be ideally undertaken in the first three months of the new financial year. Do not procrastinate it to the last minute or else you may end up investing in a tax saving instrument that will not fulfil your financial goals. The purpose of saving tax will be served, but your returns will suffer. When you begin early, you can take calculated decisions based on your risk appetite & financial objectives, maximize the deductions & credits, and give more time for your investment to grow.
2. Restructure Your Salary
There are certain allowances and perks in your salary, which are exempted from tax deduction. While the eligibility of these components is subject to company discretion or your job position, you must find out if you can avail them to reduce your tax liability. A few examples:
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Transport/conveyance
- Telephone and internet
- Medical treatment
- Food coupons
- Children’s education allowance
- Reimbursement of car expenses such as driver’s salary, fuel & maintenance
- Uniform allowance
Lifestyle allowance
3. Submit Tax Declaration to Your Employer on Time
Salaried individuals are expected to submit an Income Tax Declaration form to the employer at the beginning of every financial year. It is a provisional statement mentioning details about your proposed investments and expenses that are deductible from the income tax. By the end of the financial year, you have to support this declaration with actual proofs. Since employers have to pay advanced tax every quarter, they deduct TDS from your salary every month, based on your declaration. If you fail to submit the required investment proofs within the stipulated deadline, your employer will be compelled to deduct the entire tax amount without taking your provisional investments into consideration.
Though you can claim the tax refund later, you are paying higher taxes in the interim period. If you submit the declaration and proofs on time, you can save yourself from paying higher taxes round the year. Not only this, you can use the amount saved on taxes by investing it to earn returns. Basically, you are saving taxes as well as earning an income on it.
Similarly, if you have switched your job in the middle of the financial year, do not forget to redo your tax planning. It is advisable to inform your new company about the income earned and TDS paid in that financial year from the old company. By doing so, you will again ensure that you don’t pay higher taxes.
4. Look Beyond Section 80C
Most investors are aware of only Section 80C for tax planning. But, there are several other tax saving options which give you additional tax exemption, apart from that in Section 80C. The table below will help you to understand better.
| Income Tax Section | Deductable Amount | Tax Saving Schemes |
| Section 80C | Limit: Rs. 1,50,000 | * Public Provident Fund (PPF)* Employee Provident Fund (EPF)* Principal Repayment of Home Loans* Fixed Deposits (FD) and National Saving Certificates (NSC)* Life Insurance Premium (ULIPS, Term and Endowment)* Equity Linked Savings Scheme (ELSS)* New Pension Scheme (NPS)* Sukanya Samriddhi Account Deposit |
| Section 80D | Limit:* Rs 25,000 for non-senior citizens (self, spouse and dependent children) * Rs. 30,000 for senior citizens (attained 60 years of age) * Rs. 35,000 for very senior citizens (above the age of 80 years) | Health insurance premium in case of non-senior and senior citizens Medical expenditure only in case of very senior citizens as they can’t avail health insurance |
| Section 80DD | Limit:* Rs. 75,000 for disabled dependents* Rs. 1,25,000 for dependents with severe disability (Dependents include spouse, children, parents & siblings) | Medical treatment |
| Section 24B | Limit:* Rs. 2,00,000 for a self-occupied property and rented out property | Interest on home loans |
| Section 80EE | Limit: Rs. 50,000 | First time home buyers |
| Section 80E | No limit | Interest on the educational loan for higher studies for self, spouse or children |
| Section 80GG | Limit: Rs. 60,000 | Individuals who do not own a residential house and do not receive HRA |
| Section 80G | Subject to terms and conditions | Donations to charitable institutions and relief funds |
| Section 80TTA | Limit: Rs. 10,000 | Interest on deposits in a savings account with a bank, co-operative society or post office |
| Section 10(10D) | Sum assured should be equal to 10 times | ULIPs, Term, Endowment and Moneyback Plans* Maturity Benefit/ Death Benefit/ Surrender Value * Sum allocated by way of bonus |
A few of these sections have sub-clauses which can enable you to avail even further tax deductions. For instance, you can avail:
- An additional deduction of Rs. 50,000 (over & above Rs 1.50 lakhs) for contribution to the New Pension Scheme (NPS) under Section 80CCD.
- If you take a joint home loan with a spouse, parent or sibling, each of you can claim benefits under Section 80C and section 24B.
In case you are eligible to claim tax benefit in any of the above sections and find it complicated to understand, it would be a good idea to contact a professional tax expert.
5. Save Tax on set-off applicable to Capital Gains
Short Term Capital gain on the sale of assets such as shares, mutual funds, gold or property is taxable. Perhaps what you may not know is that capital gain from some specific asset classes can be set off against the capital loss from another asset class. Short term capital loss (both in equity or debt mutual fund) can be set off against short term capital gain (equity or debt) or long term capital gain (debt). However, long term capital loss (equity or debt) can only be set off against long term capital gains (debt).You can carry forward capital loss for 8 years, so you can offset the gain, if any, for these many years and save taxes.
Lastly, remember that tax planning should be an ongoing exercise. It should be in tune with your overall financial planning and reviewed periodically to ensure that you are on the right track to saving taxes.
